Welcome back to Melissa Making Cents.
For anyone new to my blog, My name is Melissa Cox. I am a CERTIFIED FINANCIAL PLANNER™ and College Planning and Student Loan Advisor with Fetterman Investments, Inc. in Dallas, Texas.
By now your Facebook feeds are full to the brim of adorable kids heading back to school on their 1st day. To me, there is nothing more adorable than seeing the “littles” carrying their big ole backpacks!
This time of year for older students and their families brings up a little bit of anxiety though. College is right around the corner! For high school seniors and their families, we are coming down to crunch time. There are A LOT of deadlines to think about between now and graduation time. Parent of high school sophomores and juniors I’m also looking at you! It’s about time to sit down with your parents and start building your college plans.
Student loan debt is at a record high and growing
So let’s address a major topic today. According tot he US Federal Reserve, Student loan debt is at a record $1.5 trillion, and is growing at a staggering pace each year of approximately 1% or $100 BILLION! According to an Experian report, in my home state of Texas alone we grew our student loan debt at 5.8% just last year! (It’s safe to insert the phrase, EVERYTHING is bigger in Texas) I’m challenging YOU to help us change this awful crisis.
For some lucky students, parents have been able to sock away money for college. But other families have been working too hard on reducing their own college debt and making ends meet to be able to save for their children’s college. Which just creates an inevitable cycle of perpetual student debt. Ever wonder why so many firmly believe that student loan debt is a scam? Graduates are stuck paying these loans for 10-25 years, and sometimes longer. This also means that many of us are not able to think about saving for retirement until that huge burden is gone.
Student loans can strain relationships
But what else does this debt do? In some cases it creates mega problems between the kids and their parents. In a recent conversation, I asked a woman how her daughter was doing. (I knew she had just graduated the year before.) The woman responded…. “I’m sorry I don’t know. She stopped speaking to me when I couldn’t afford to pay for her student loans.” My heart broke for her, I knew she had struggled to pay off her own student loans and was finally able to retire on a modest fixed income. The woman and her daughter had never sat down and set realistic expectations for her daughter’s college education.
So let’s get to the point. And listen to me on this. IT IS ENTIRELY POSSIBLE TO GO TO COLLEGE WITHOUT TAKING ON HUGE AMOUNTS OF STUDENT DEBT!! Now, go back and re-read that last sentence at least 4 times. Make it your Mantra. It is possible, and no it’s not just for those in an elite demographic world.
Saving FOR College vs Saving ON College
There are two phases in planning for college. The first phase is the Saving FOR College Phase. This is where money can be aside for education. The second phase is what Unfortunately they found out they made too much for need based aid, and merit awards at the chosen college were insignificant.
Saving ON College is a process. The family should sit down to have a realistic conversation around the cost of college and what is affordable. They should discuss the family's financial situation and the student's academic desires. Are they a high merit/low need, high merit/high need, low merit/high need or low merit/low need student? How your family proceeds will depend on the situation.
Next the family should look at the student's intended career path. Although this can of course change, it can at least help give an estimate of how much student debt a student can assume.
As a rule of thumb students should NOT take out more in student loan debt than they will earn in their first year of their chosen career upon graduation. As an example, a new teacher in Texas may make $40,000 a year, whereas an engineer may come out of school with a starting salary of $60,000. Students need to consider their personal budgets after graduation when making decisions about colleges. How much a student can expect to earn is an important factor in considering student loan debt.
Know before you go - What is your Net Price for college?
Colleges you and your student are considering might have a "Net Price Calculator" on their website. If they do...USE IT! Learn the difference between the types of colleges and which schools are Need Based vs Merit Based. Develop a plan to use student loans wisely. Right now we are tasking our 17 and 18 year olds who may have never had a job, paid taxes, or had any exposure to personal finance to make one of the largest buying decisions of their life before their adult life has even begun.
I help my clients establish a college budget using the College Pre-Approval™ process to ensure students graduate with manageable student loan debt, while at the same time helping their parents keep their retirement plans intact. At that point one can effectively shop for schools that will meet your financial and academic needs.
Here is something else you should keep in mind - it is possible to know in advance a very good estimate of how and what you and your student will pay for college. This knowledge can help significantly when you plan how college will be paid for.
It is time that to start becoming smarter consumers of education. As a society we HAVE to make some changes to help alleviate the national Student Loan Debt Crisis. Yes, a college education is a big expensive decision, but it doesn’t have to come at the cost of your family’s secure financial future.
So I’ll leave you here for today. Until next time….this is Melissa Making Cents
Melissa Anne Cox
CERTIFIED FINANCIAL PLANNER™ is also a College Funding and Student Loan Advisor in Dallas, Texas